Wednesday, January 09, 2008

Deutsche Bank forecasts 4% GDP growth

Deutsche Bank forecasts 4% GDP growth

State spending to spur private investment


The Thai economy is expected to benefit from stronger fiscal spending which will help spur private investment in 2008, according to Michael Spencer, Deutsche Bank's managing director for global markets research. Mr Spencer said the new government was likely to promote fiscal stimulus through a mid-year supplementary budget to help spur private investment.

''The Thai government typically enlarges fiscal spending when export growth slows down. Fiscal capital expenditure should increase to 15% year-on-year, from 7% year-on-year growth [under the fiscal 2008 budget] to be sufficient,'' he said at a briefing in Bangkok yesterday.

Greater fiscal spending would increase the budget deficit to 2% of gross domestic product (GDP), compared with 1% under the current budget.

Deutsche Bank projects Thai economic growth of 4% this year and 4.5% in 2009. The forecast is based on an assumption of 3% private consumption growth this year and 4% in 2009, compared with 1.6% growth in 2007.

Overall investment this year is projected to rise 4%, compared with 1% growth in 2007. Export volume is projected to grow 4.3% this year and 6% in 2009.

Mr Spencer said private investment had been slowing down since late 2003 partly because of the higher oil prices.

Thailand's competitiveness had also declined in comparison with countries with cheaper labour costs such as China and Vietnam, as well as high-technology producers like Taiwan.

Thailand is one of several Asian countries where investment has been below its potential for the past few years, he said.

''Politics has been blamed, but there is a deeper underlying economic reason. The challenge for Asean countries, including Thailand, the Philippines and Indonesia, is to break the middle ground,'' Mr Spencer said.

He said the Thai economy was relatively less sensitive to the US economy than to oil prices compared with other Asian countries.

Thai economic growth would fall by 0.5 percentage points for every one-point slowdown in US growth. But Thai growth would decline by 0.6 percentage points for every 10% rise in oil prices.

''Oil prices, which are expected to fall 15% this year, could benefit Thailand more than other Asian countries,'' he said.

Mr Spencer said the Bank of Thailand was likely to cut interest rates twice from 3.25% now in the third quarter as inflation decelerated.

He expected Brent oil prices to drop 15% to $65 per barrel by the end of 2008, in light of slower demand from the US and China.

The baht, meanwhile, was expected to continue to appreciate, reaching 32.5 to the dollar by the end of 2008.

The central bank is unlikely lift the 30% reserve requirement on capital inflows this year, as it currently had no tangible impact on economic growth.

Mr Spencer said the dollar was expected to gain against the euro in the second half of 2008, with the European currency at 1.32 to a dollar at the end of the year, as the US non-oil trade deficit declined.

He said the US Federal Reserve was expected to cut its key interest rate in the second half of the year, but the European Central Bank would likely maintain its interest rate.

He does not see the US economy entering a recession as a result of the sub-prime mortgage crisis. Strong household income is expected to offset an expected increasing default in sub-prime borrowers this year.

''We expect half of the sub-prime borrowers to default. Of the total estimated damages from the sub-prime at $300 billion, one third will be incurred by the US banks and the rest by European banks,'' Mr Spencer said.

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